Exhaustion of plan remedies not required if participant “reasonably” believes no remedy exists

A pension plan participant who sought a calculation of her future benefits under the plan was not required to exhaust remedies under the plan, given her “reasonable” belief that such remedies did not exist, the U.S. Court of Appeals in New York City (CA-2) has held.

Plan merger

A pension plan was sponsored by one partner in a joint partnership that had employed a participant for many years. The plan sponsor eventually sold its interest in the partnership, and the plan was merged into the new partner’s pension plan. Soon thereafter, the new partner sold its share to the remaining original partner, and informed the participant and her fellow employees that, for pension plan purposes, their employment had been terminated (though they still worked for the partnership). As a consequence, employees who had not reached the age of 55 before a certain date would no longer be eligible for an early retirement benefit.

In the next few years, the employee contacted benefits representatives several times by letter, at least once with the assistance of counsel, in an effort to clarify what her future benefits would be upon retirement. She never received a response. A telephone call did eventually elicit an estimate of her monthly pension benefit, which was lower than one she’d received prior to the sale. The employee filed suit in district court against the new partner and the plan, seeking a clarification of future benefits under ERISA §502(a)(1)(B) and alleging that the elimination of the early retirement benefit was an impermissible plan amendment under ERISA §204(g).

Exhaustion of remedies

The district court granted summary judgment to the plan because the employee did not follow the benefit claims procedures required by the plan and thus had failed to exhaust her administrative remedies.

Reasonable interpretation

The appellate court vacated and remanded the ruling in favor of the plan. Plan participants are not required to exhaust administrative remedies where they “reasonably” interpret plan terms not to require exhaustion and as a result do not exhaust their administrative remedies.

Based on its review of the plan’s claims procedures, the court determined plan terms to be ambiguous as to whether the employee was required to use those claims procedures to contest the plan administrator’s calculation of potential future benefits. Given the ambiguity, the employee’s repeated efforts to get information from the plan (most of which were met with silence) demonstrated her confusion as to the correct procedure to follow. She reasonably concluded that the only means of vindicating her claim was through a lawsuit.

Impermissible plan amendment

The employee had also alleged that the elimination of the early retirement benefit was an impermissible plan amendment under ERISA §204(g). The appellate court declined to adopt the district court’s view that ERISA §204(g) was inapplicable because the employee had alleged only a constructive amendment to the plan via plan interpretation, and not an actual change to the text of the plan. However, it concluded that the employee had failed to adequately allege even a constructive amendment to the plan, and affirmed the lower court’s dismissal, while noting the employee could amend her complaint if discovery were to reveal evidence of an amendment.

Source: Kirkendall v. Halliburton, Inc. (CA-2).

Source: General Explanations of the Administration’s Fiscal Year 2014 Revenue Proposals, Department of the Treasury, April 2013. EBRI press release, April 10, 2013. ASPPA press release, April 5, 2013. ERIC press release, April 10, 2013. PSCA press release, April 10, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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